The California Air Resources Board finalized the nation\u2019s first economy-wide carbon cap-and-trade program Oct. 20. After an all-day meeting, the board unanimously adopted final amendments to its greenhouse gas trading market that puts a ceiling on emissions from power plants and other major industries in 2013. Two years later, transportation fuels and natural gas come under the carbon ceiling. The hard cap is to set to decline annually until 2020. \u201cCap-and- trade is one of the new tools to provide a reward for doing the right thing,\u201d said Mary Nichols, Air Board chair, namely, reducing carbon emissions. \u201cIt sends a clear signal to the global investment community that investing in clean tech in California will be rewarded.\u201d Numerous questions remain about the state\u2019s complex market program--from its vulnerability to fraud in trading and offset markets to impacts on local air pollution and independent generators. \u201cDitch cap and trade,\u201d said Julia May, Communities for a Better Environment senior scientist. She warned the carbon market regulations fail to address fraud, over allocation of carbon allowances, and disparate impacts on low-income communities. She and other environmental justice advocates continued to warn that neighborhoods plagued by poor air quality would suffer more because of polluters paying for more emission credits instead of reducing greenhouse gases. Air board staff concluded that the cap-and-trade\u2019s potential for adverse localized air quality impacts was \u201csignificant and unavoidable.\u201d Local air quality regulators urged the board to direct staff to work closely with them to help control increased concentrations of emissions. Utilities largely supported the trading market. They are to receive for free 100 percent of their carbon allocations, which aim to represent their expected 2012 emissions. Pacific Gas & Electric lobbyist Kate Beardsley applauded the program\u2019s carbon allocation, price containment mechanisms, and \u201chigh quality offsets.\u201d A number of power producers, in particular cogeneration facilities that signed long-term agreements before the 2006 enactment of AB 32, warned they have no ability to recover the costs of allocations associated with their facility emissions. The counterparties, which may be traders or utilities that get allocations for free, have no incentive to renegotiate the deals, the generators said. The size of this subset of power producers is not known because the Air Board survey conducted last year on the matter was not publicly released, according to Steven Kelly, Independent Energy Producers policy director. The independent generators also complained the Air Board market favors the Bonneville Power Administration. The carve-out for BPA\u2019s unspecified sources of imported power gives it a \u201ccompetitive advantage\u201d at \u201cthe expense of all other obligated entities within the electric sector,\u201d IEP and WPTF stated in a letter submitted to the Air Board at the end of last week. Some stakeholders are keeping close tabs on the allocation of the tradable emissions. According to Air Board staff, over the life of the program there\u2019ll be 2.5 billion allowances. Each one represents one metric ton of carbon dioxide equivalent. Another top concern of stakeholders is the methodology used to decide the number of emission allocations for oil refiners. The transportation sector is the largest source of greenhouse gas emissions in California. Second in line is the electricity sector, responsible for about 20 percent. Non-utility industrial representatives and refinery blue collar workers asserted the program would raise the cost of doing business leading to job layoffs. Before adoption of the program last December, established environmental groups publicly touted the trading scheme. They insisted California, with the market program\u2019s price on carbon, was stepping center stage to help contain climate change. The trading program is \u201cnot a replacement for existing clean air laws,\u201d noted Bonnie Gen Holmes, California Lung Association lobbyist. How critical parts of the nation\u2019s first multi-sector carbon trading program unfold, however, are to be determined by the effectiveness of the Air Board\u2019s monitoring programs. They include the ability to detect and thwart emission trading frauds, which have plagued the European Union market since it was launched in 2005, and excessive speculation. Environmental Defense Fund\u2019s California climate change director defended the state\u2019s emerging program as distinct from Europe\u2019s trading scheme because of its single market and centralized database. In the EU, there are more than two dozen national markets. Another difference is that the Air Board\u2019s market includes holding limits for participants to avoid excess speculation and is to require polluters to surrender part of their required allotments at regular intervals, EDF\u2019s Tim O\u2019Connor added. In addition, the market is to be policed by an independent market monitor with trades tracked by the Air Board. Other carbon market concerns include how \u201cadaptive management\u201d strategies aimed at curbing unexpected program impacts near and far play out on the ground. Key concerns include whether international forestry projects displace local populations. The effectiveness of the Air Board\u2019s so called adaptive management plan remains to be seen as it is still under development. The agency said it would keep a lookout for such problems and change course as needed to solve them. The carbon market is expected to help meet the state\u2019s climate protection law, AB 32. The cap-and-trade program aims to meet 20 percent of the mandated greenhouse gas emission reductions. AB 32\u2019s reduction target is 15 percent below what emission levels would be by 2020 if there was no reduction mandate. The cap-and-trade program seeks to cover 85 percent of the state\u2019s greenhouse gases \u2013 represented by 350 businesses and 600 facilities. The initial cap for 2013 is 162.8 million allowances, which is to decline two percent annually the next two years. The ceiling is to be raised to accommodate the transportation and fuels sectors beginning in 2015, with the cap rising to 394.5 million allowances. It is to drop to 334.2 million allowances by 2020. The Air Board\u2019s trading scheme stalled after facing legal challenges. The court ordered a new analysis after environmental justice advocates sued, claiming the agency\u2019s initial AB 32 plan failed to adequately examine a broad range of alternatives to the market-based approach. The court also found the Air Board\u2019s initial analysis gave short shrift to other strategies. The carbon market rules must be approved by the state Office of Administrative Law before they can take effect.